Avid Bioservices Inc (CDMO)

[Fire Fox]

It's a very encouraging sign to see that Michael Hedge, whose name is on the cover of the S-3 and who is the leader of the K&L Gates Life Sciences M&A team ( http://www.klgates.com/life-sciences-practices/ ), has advised the Company to use Preferred Stock financing as one of its options.

Preferred Stock is placed with institutions and other long term holders. It is better for the Company than a financing based on straight debt plus warrants because:

(1) the preferred stock dividend rate will be "cumulative" but not mandatory. That's why preferred stock can be called equity rather than debt. If the 8% or 10% coupon had to be paid each quarter whether or not there were earnings, it would be a debt instrument. But because dividends can only be paid out of earnings and have to be "declared" by the Board, the Company could go a year or two without paying these dividends, and then pay them in a lump sum at a time of its choosing. The key for the investor is that the dividends are "cumulative", meaning they don't go away and have to be paid at some time before other equity holders get anything.

(2) the cumulative dividend obligation owed by the Company is not "secured" by the technology of the Company. By its nature, preferred stock has a "preference" over common stock in liquidation, but the dividend obligation would not be "collateralized" by Avid or the anti-PS patent portfolio. Thus the investor in preferred stock is a large entity that has confidence that PPHM will succeed and ultimately pay the cumulative dividend amount. The preferred stock investor is not looking to be protected by the right to sell off the collateral prior to bankruptcy.

(3) When preferred stock is issued in publicly-traded companies, the investors have the right to convert into common at a pre-determined discount below the average public stock price as determined over some period of time prior to the conversion date. This is a huge advantage for PPHM. Unlike debt plus warrants, where the warrant exercise price is pegged to the stock price at the time the loan is made, preferred stock would minimize dilution because the institutional investor would be counting on converting into common for 20% - 30% below the public price a few years from now and then immediately selling the stock in the open market when we will be trading 15-20 million shares per day.

(4) Depending on how the preferred stock terms are drafted, there is often, but not always, a right for PPHM, on 30 or 60 days written notice, to redeem the preferred for the same principal amount that was originally invested plus payment of all cumulative dividends. This is a vehicle used in control battles to force a large institutional investor to convert his non-voting preferred shares into voting common shares … or get redeemed.

As a general matter, a long time ago PPHM shareholders approved a new Delaware Charter that gives the Board what's called "blank check" preferred stock authorization. This means we have confidence that the Board should be able to determine all of the variables discussed above (i.e. dividend rate, conversion discount, redemption rights, etc.) without having to go back to the shareholders. Preferred stock is usually sold for something like $1,000 or $5,000 per share so it doesn't matter at all how many preferred stock shares have been authorized. Of course they preferred shares can only be converted into common shares that have already been authorized.

Hope everyone can see why the S-3 Registration of these Preferred Shares multiples the opportunity for dramatically better financing terms than what was done with Oxford. A preferred stock financing is designed to be placed with large and knowledgeable institutions who can see the commercial potential of the anti-PS platform 2-3 years from now.

If Goldman Sachs or someone like that buys $60 million of this Preferred Stock offering, what they will really be betting on is that they can flip their block of preferred stock to Merck or BMS 3-4 years from now for a huge control premium over what they paid today. Yes, they will like the fact that the 9% cumulative dividend is 3 times what they can get on a 10-year Treasury Note, but what they are really hoping for is that the Company will be "in play" three years from now and the same Preferred Shares that they bought for $5K/share can be sold to BMS for $25K/share. I'm sure Michael Hedges is smart enough to put a restriction in the Preferred Stock Purchase Agreement saying that PPHM's new investment banker cannot sell the preferred shares to a third party without the Company's consent.

The real drivers for all of this are the new KOLs on the Advisory Board. When the head cancer immunotherapy analyst at Goldman Sachs sits down with Drs Gabrilovich and Antonia for a little discussion of how Bavi effects MDSCs and promotes an anti-cancer TME (Tumor Micro Environment), we will finally have the weight and credibility needed to pull of a preferred stock financing play like this.

Of course it won't hurt if Dr. Garnick also shows up at the Goldman Sachs meeting and explains why the Phase III trial design and early-look opportunities all indicate that the FDA is showing a very positive and supportive attitude towards the Ph III trial